Investors should cheer China's probe into stock-price manipulation as it builds a foundation of trust as Beijing opens its capital markets to foreign investment, one expert said.
The China Securities Regulatory Commission (CSRC) announced late on Friday that it was examining possible charges of manipulation amid rapid price gains in 18 shares, 15 of which are small-cap firms traded in Shenzen, including Cloud Live Technology, Shanxi Baiyuan Trousers Chain Management and Shandong Xingmin Wheel.
The probe sparked heavy selling amid small-caps on Monday, with the ChiNext index sliding over 5 percent, the biggest drop since 2013.
The investigation should be viewed as a positive factor as it's aimed at improving the image of the stock exchange rather than cracking down on market players, said Hao Hong, managing director of research at BOCOM International.
"The CSRC has identified a number of companies in potential violation of stock trading rules and they have been preparing for this for the past two years: They've been importing Chinese-born experts from the American SSEC investigation unit. They pay them to build up an investigative team to probe into irregularities so by now, CSRC should have pretty strong capabilities in detecting illegal activities," Hong told CNBC on Tuesday.
"The probe is also designed to protect the smaller investors, who have been in a position of disadvantage in the past. There has been quite a bit of rigging going on so now, the CSRC is leveling the playing field though it's going to reduce the transaction costs for many of the other guys," Hong added.